US execs charged over $1.1bn bogus income

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In an escalation of investigations into the food industry, four executives of US Foodservice were indicted on Tuesday on charges of inflating company earnings by more than $US800 million ($1.1 billion). Prosecutors said they were continuing to investigate executives there.

The Securities and Exchange Commission filed a separate civil complaint against the four executives of US Foodservice, a distribution subsidiary of the Dutch supermarket conglomerate Royal Ahold. It accused them of overstating income by a smaller amount - $US700 million - and of pressing many suppliers to help conceal fraud.

One of the four and another man, a supplier to US Foodservice, were also charged with securities fraud and lying to investigators about a plan to trade on advance knowledge of the $US3.5 billion sale of US Foodservice in April 2000. And they were sued by the SEC on accusations of insider trading.

At a news conference in Manhattan, prosecutors and regulators said they would continue to investigate US Foodservice, the parent company, and its American suppliers. Kraft Foods, General Mills, Tyson Foods, ConAgra Foods, Sara Lee and HJ Heinz say they had been contacted by regulators.

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Investigators were vague whether their inquiries extended beyond those companies into the larger food industry. "We are taking a broad look both up the ladder and down the ladder," the US attorney in Manhattan, David Kelley, said.

This week's indictments, which followed a year-long investigation, were a blow to the already battered Royal Ahold. The investigations were prompted by a supplier which complained to its auditors about being pressed into schemes by US Foodservice.

In turn, the auditors informed government officials. When Royal Ahold announced it would have to restate its earnings, largely as a result of those misrepresentations, its share price, prosecutors said, plummeted more than 60 per cent, a drop of $US6 billion in market value.

Michael Resnick, 42, the former chief financial officer of US Foodservice, and Mark Kaiser, 47, a former top marketing executive, were charged with fraud, conspiracy and misleading regulators with financial statements that inflated the income of the company, in Columbia, Maryland.

They are expected to surrender in federal court today.

Timothy Lee, 40, former vice-president for purchasing, pleaded guilty to similar charges on Friday, and another high-ranking executive, William Carter, 43, did so on Monday. Both are expected to co-operate with investigators.

In addition, Lee was charged along with Peter Marion, 53, a former supplier to US Foodservice, with taking part in insider trading from late 1999 to early 2000 in connection with the sale of the food distributor to Ahold. Lee pleaded guilty to two counts related to tipping off food vendors about the impending merger.

Lee's lawyer, Jane Barrett, said her client accepted full responsibility for his conduct. Marion, who made at least $US363,000 from the sale of US Foodservice stock, is charged with six counts of fraud related to trading on insider information. He also faces obstruction of justice charges.

Kaiser's lawyer, Richard Morvillo, said his client would plead not guilty. "We believe that he hasn't engaged in any wrongdoing and will defend himself vigorously," Mr Morvillo said.

James Miller, the founder and former chief executive of US Foodservice, who rapidly expanded the company through a series of acquisitions and aggressive marketing tactics, was not named in yesterday's indictments. Regulators and prosecutors refused to comment on whether he remained under investigation.

Though the scale of the purported fraud is large, the case against the executives laid out in the three-count indictment was relatively simple.

"It boils down to an earnings-management scheme," Mr Kelley said, and "a cooking of the books fuelled by the greed of the defendants".

Distributors like US Foodservice typically receive promotional rebates from suppliers tied to specific placement or sales of particular products.